It sounds to me like the Hard Drive is either dead or dying. Is this a tray-loading or slot loading iMac G3? The Hard Drive replacement methods are quite different from each other. (although neither are terribly difficult)

You can find old IDE hard drives 60GB and below for next to nothing nowadays, (literally $5 or free, some people have tons of them lying around.) Size doesn't really matter as long as it's below the iMac G3's max size of 128GB.